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ISAs (Individual Savings Accounts)

By: Garry Crystal - Updated: 13 Oct 2012 | comments*Discuss
Isas (individual Savings Accounts)

ISA's or Individual Savings Account are perfect for people who wish to invest some extra cash for a rainy day. With an ISA you can have immediate access to your money and at the same time allow your funds to expand free from any capital gains tax or income tax. Basically ISA's are tax free savings accounts that are a wise additional investment on top of your traditional pension plan.

The Rules of Investing in an ISA

ISA's are open to anyone over the age of 18 and resident in the UK. You can open an ISA when you are 16 but there are restrictions as to the types of investment. You cannot open joint account ISA's or open them on behalf of another person. All that is needed to open an ISA is a few personal details and your national insurance number.

There are maximum amounts that can be placed into ISA's each year and any income or capital gains does not have to be declared to the taxman. The tax free aspect is particularly useful to over 65s who enjoy an increased personal tax allowance.

Types of ISA

Investors in ISA's are granted an annual ISA investment allowance. By choosing the different options of a mini-ISA or a maxi-ISA you can invest your annual allowance in a range of investment and savings options.

Maxi ISA

With a maxi-ISA you must have a stocks and shares investment where you invest your money in bonds, shares, unit, gilts, investment trusts and life insurance options. The maxi-ISA can also have an optional cash investment where you can deposit cash in banks, building societies and/or Nationals Savings with a higher rate of interest; the cash option is good for easy access to your money.

With a maxi-ISA your maximum annual allowance is £7000, which can be placed fully into stocks and shares or split between the stocks and the cash component with whichever amount in each you decide. If you place the full £7000 into stocks then you cannot place any money into the cash investment in that financial year.

Mini ISA

You can invest in up to two mini-ISA's per tax year but you can only place a certain amount in each component. With a mini-ISA you can only invest £4000 in stocks and shares and £3000 in cash investments. Mini-ISA's are good for investors who want flexibility between their investment options. However if you want to place a greater amount of your money into stocks and shares you may be better with a maxi-ISA.

Risks and Benefits

As with any investments in stocks and shares there will be a risk factor depending on you investment options; stocks can go down as well as up. You can cut your chance of a loss by using an independent financial advisor. A financial advisor will be able to guide you, and depending on your attitude to taking risks, can be either cautious or aggressive with your investment options. In terms of investment the stock market does have a potential for growth that cash deposits cannot match over the long term.

If you want to make sure your money is secure then you should think about using a cash ISA only. Your money will be safe although the returns may not be as high as the stocks and shares options.

ISA's are a good investment option on their own or when used to save some extra cash as an addition to a pension scheme. Remember to shop around and get the best rates that you can and always read the small print for restrictions including notice needed to gain access to your cash.

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